Political unrest is causing supply chain problems for cigar manufacturers
By Frank Seltzer
Last year was a banner year for Nicaraguan cigars. In January, the country celebrated its cigar heritage and success with its Puro Sabor festival, and Nicaragua was ranked as the No. 1 cigar maker for the U.S. market, according to the Cigar Association of America, producing more than 148 million premium cigars versus the Dominican Republic with more than 118 million. The bulk of Nicaraguan cigars come from Esteli. But that is unlikely to be repeated this year because of the troubles in Nicaragua.
Back on April 18, President Daniel Ortega cut social security but increased the contributions, which prompted a civil uprising against him. The unrest was led by students but soon spread nationwide. Barricades were erected on most roads in the country and tens of thousands have protested the government calling on Ortega to step down. He has refused. His term and his wife’s—who is Vice President—officially ends in 2023. The chaos in the country has continued with even a one-day strike, shutting down most industries including the cigar makers early in June. Meanwhile, there are reports of more than 200 deaths, nearly 1,300 injured and 1,000 people jailed.
Last week, the Organization of American States condemned Ortega’s handling of the situation, saying it is a serious violation of human rights. Ortega’s responded that the report was wrong and that the protestors are the ones who are causing the violence, not the police and paramilitary groups under Ortega’s control. So far the army has stayed neutral in the matter.
No matter who is to blame, the result on the cigar industry is troubling. Aside from the lost day of production during the strike, cigar makers are having a difficult time getting product out of the country. The barricades have stopped much of the traffic. Last week, Jessi Flores from Drew Estate reported on Facebook that there was heavy shooting on the south side of Esteli. It turned out that police and others had entered Esteli with the intent to remove the barricades. There is no word on how many barricades were removed or if they have been replaced.
Last week, Ortega’s people held talks with representatives of the protestors and the Catholic Church to try to come up with a solution, but those talks broke off. Another round was supposed to happen on Monday, however, getting accurate reports out of Nicaragua is sketchy at best.
According to Rocky Patel, the situation in Nicaragua and Esteli is bad. He says, “We are having problems getting product out. I just paid a lot more for a container so that we could get them out of Honduras. We are literally taking them out at 3 in the morning and driving them from Nicaragua to Honduras to get them out. That’s what we’ve been doing.” He adds a few weeks ago several people were shot outside his factory. In terms of his workers, he says only about half are showing up because they are afraid.
Alex Menendez of American Caribbean Cigar company agrees with Rocky adding, “Nicaragua is on the verge of a civil war. I hate to call it that but there is crazy unrest.”
He says there have been some deaths in Esteli but overall the town is insulated. Getting product out is another problem. Because American Caribbean is a smaller factory producing only about 25,000 cigars a day, they don’t need 18-wheelers with containers and can use smaller box trucks. “We took everything we had over six days old and sent it out. We really don’t want to have backorders. If you can get it, get it now.” But he cautions, “By the [IPCPR] show, someone may have bought it all.”
He is continuing to bring out the smaller trucks through Managua, but the drive that usually takes two hours is now takes more than six, and those runs are overnight when many barricades are not manned. Menendez acknowledges all of that could change in an instant for the better or worse.
Even Steve Saka of Dunbarton Tobacco and Trust wrote on Facebook last week of the situation in Nicaragua: “Delays, delays and more delays—getting samples of the new stuff to the IPCPR is in question. And we do believe we will be out-of-stock on most, if not all, SKUs within the next 45 days. Overall, the turmoil in Nica continues to escalate.” The best advice to retailers is order now while companies have stock. No one knows what tomorrow may bring. And should the situation in Nicaragua turn worse, the domino effect could create shortages of Honduran and Dominican cigars as the manufacturers try to fill the void.
Good news for retailers
Some good news for retailers: According to the Wall Street Journal last week, UPS and its union came to an agreement to avoid an August 1 strike deadline. Most cigar manufacturers use UPS to deliver cigars to the stores, and a strike would have hurt that distribution.
Another positive thing for retailers may be the Supreme Court decision last week that ruled states can charge sales tax on internet sales. This could have a big impact on the catalogue companies, as states will most likely pass laws to allow for the collection not only of sales tax, but the possible eventuality of tobacco tax, removing the price advantage of the internet. Menendez says many manufacturers do a lot of business with the catalogues and it would hurt them short term but in the long run it would be great for the industry by bringing back brick and mortar.
“It would help mom and pop stores to grow. They are hamstrung because people are buying sticks in the lounge, but getting their boxes on line. With the price advantage gone, it would force those customers to buy the boxes at their local store and everybody would be healthier. You’d have to be a dummy to ruin it because it will open a whole new market.”